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Author: makfan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 942  
Subject: Re: Dumb question about split... Date: 12/7/1999 6:26 PM
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When do companies split their stock? Say a company has 100 shares priced at $10 each. If it wants to split in ratio say 2:1, it will have 200 shares outstanding after split at $5 each. Where does the company get those additional 100 shares from. Does stock split means equity has doubled also?

Companies generally establish in their bylaws the number of authorized shares of each type of stock (common, preferred, etc.). In your example, say the company is authorized to issue up to 500 shares. The outstanding shares would be 100. To effect the split, it simply issues an additional 100 shares from the authorized amount, making the authorized shares equal 200.

The equity section of the balance sheet in the annual report/10K has to indicate the number of authorized, issued and oustanding shares for each type of stock. The difference between issued and outstanding shares is called 'treasury stock', which is stock the company has reacquired.

A split has no effect on the equity. Depending on the capital structure, the accountants may have to transfer money from retained earnings to the capital stock accounts, but the net change to equity for a split is 0.

I hope this wasn't too long winded and technical. :)

Mike
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